Despite all the negative economic headlines around, I reckon it’s a great time for me to think about investing £2,000 in FTSE 100 shares.
In fact, it’s possible to find some of the best value in stocks when the general news seems grim and share prices have fallen.
It’s the classic tactic billionaire investor Warren Buffett uses. He’s known for his long-term approach to investing in stocks. So when he buys shares in troubled times, he often holds them for years/decades.
Buying right
But buying at the ‘right’ price is a key part of Buffett’s strategy. He often talks about aiming for a margin of safety. And that means buying stocks when they are understating the true worth of a business and its potential to grow.
In other words, he buys when the valuation is as low as possible. And lower valuations are most often found during setbacks, bear markets and corrections when many other investors are avoiding stocks.
However, it takes a strong emotional constitution to execute a tactic like that. My natural instinct is to run away from stocks with everyone else when the general economic outlook is stormy. But finding a way to operate in a contrarian manner can pay handsomely over time.
Indeed, bull markets have so far always followed bear markets. And, over the years of holding a stock, investor sentiment can change by degrees from despair to elation. Although that doesn’t always happen and some cheap valuations prove to be cheap for a reason. And that reason is often that the underlying business is a turkey.
But when things do click, a cheap valuation with an earnings multiple of, say, seven can turn into a multiple of perhaps 20 over time. And that’s what I’d call an upwards valuation re-rating. It’s a marvellous effect that can send share prices much higher. But, on top of that, businesses tend to make progress by increasing their earnings a little each year. And that can be another long-term booster for share prices.
Self-discipline and hard work
I reckon those two boosters explain much of Buffett’s considerable success with stock investing. But the strategy takes self-discipline and hard work. And that’s because it’s important for me to choose my stocks and shares with great care. So it’s essential to research the underlying business to identify its opportunities, threats, strengths and weaknesses. And then I need to take a thoughtful approach to my investment decisions.
There are risks, of course. And not every investment will work out as I hope. Even Buffett has made mistakes over the years and ended up selling stocks at a loss. But, nevertheless, I’m prepared to embrace the dangers in pursuit of long-term gains. And the FTSE 100 index is a decent place to put £2,000 to work.
For my own strategy, I’d consider investing in some of the smallest businesses in the index. And that’s because they often have a longer runway of growth ahead of them than those with the biggest market capitalisation.
